Job Market Still Healthy, Wages Outpacing Inflation, Factory Orders Surge, Consumer Confidence Hits 2-year High

- The Change in Non-farm Payrolls for January rose 111K versus estimates of 150K and an upwardly revised 206K in December.
- The Change in Manufacturing Payrolls for January fell -16K versus estimates of -11K and a downwardly revised -18K in December.
- Average Hourly Earnings for January rose 4.0% versus estimates of a 4.1% gain and a 4.2% increase in December.
- Factory Orders for December rose 2.4% versus estimates of 1.9% and a 1.2% gain in November.
- The Final Univ. of Mich. Consumer Confidence reading for January fell to 96.9 versus estimates of 98.0 and a prior estimate of 98.0.

BOTTOM LINE: Employers in the US added a smaller-than-expected 111,000 workers to payrolls in January, evidence of an economy growing at the moderate pace predicted by the Federal Reserve, Bloomberg reported. The US economy needs to create about 75,000-100,000 jobs a month to keep the unemployment rate steady. Americans’ average hourly earnings grew 4.0% year-over-year, well above the long-term average of 3.2% and the most recent CPI reading of 2.5%. Consumer spending, which accounts for over two-thirds of economic growth, boosted 4Q GDP to an above-average 3.5% gain. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Orders placed with US factories rose more than forecast in December on higher demand for business equipment, motor vehicles and aircraft, a sign manufacturing is stabilizing, Bloomberg reported. Civilian aircraft orders rose 28.1% versus a 4.2% rise in November. Automobile bookings gained 6.4% versus a 2.2% rise in November. Orders for capital goods excluding aircraft and military equipment, a gauge of future business investment, gained 3.1% versus a 1% decline in November. I continue to believe manufacturing activity will improve modestly back to more average levels by year-end as the effects from housing subside and auto production improves.

Confidence among US consumers rose to the highest in two years last month as gas prices fell and the job market strengthened further, Bloomberg said. The expectations component of the index rose to 87.6, also a two-year high. The average gas price fell to $2.23/gallon nationwide in January from $2.31/gallon in December. I continue to believe both main gauges of consumer sentiment(Univ. of Mich. and Conference Board) will make new cycle highs over the coming months as stocks rise further, housing continues to improve, wages continue to outpace inflation as the unemployment rate remains low, gas prices fall further and long-term interest rates remain low.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Toyota Motor, Honda Motor and Nissan Motor, Japan’s three largest automakers, increased US sales in January, buoyed by strong demand for more fuel-efficient vehicles.
- The billionaire Desmarais family, which has made more than $9.5 billion of acquisitions in Canada in the past decade, is now targeting the US with its purchase of money manager Putnam Investments.
- SAC Capital Advisors LLC, the hedge-fund firm run by Steven Cohen, bought a 5.3% stake in Crocs Inc.(CROX), the casual-shoe maker whose shares have more than doubled since it went public a year ago. 11.9 million of the stock’s 28.6 million share float is sold short.
- The Senate voted 94-3 to approve an increase in the minimum wage after Democrats and Republicans agreed to extend tax breaks for small businesses that would bear the cost of the higher wages.
- Electronic Arts(ERTS) said third-quarter profit fell less than forecast as demand for titles including “Need for Speed” exceeded company projections. ERTS rose 6% in after-hours trading.
- Copper futures in Shanghai fell after global inventories of the metal used to make pipes and wires rose. Stockpiles monitored by exchanges in London, New York and Shanghai rose 1.6% yesterday to the highest since June 2004.
- China started construction of a $3.8 billion hydropower station in the southwest as demand for cleaner-burning fuels rises on state policies to cut pollution.

Financial Times:
- Colombia’s free trade deal with the US may be ratified by June, citing Colombia’s trade minister Maria Araujo.

Bisnis Indonesia:
- Indonesia will build a $110 million bio-fuel plant with an annual capacity of 400,000 tons in Bengkulu province on Sumatra island.

South China Morning Post:
- Hong Kong’s Securities and Futures Commission plans to relax curbs on short selling for the first time since the rules were introduced during the Asian financial crisis.
- China’s state-owned companies have been ordered to report all fixed-asset investment to the government. The government has asked the companies to file monthly reports to curb wasteful spending and overheated investments in new factories, production lines and real estate projects, citing the State-owned Assets Supervision and Administration Commission.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (HEW), target $32.50.
- Reiterated Buy on (WW), target $55.
- Reiterated Buy on (ECIL), target $11.

Business Week:
- Access Pharmaceuticals(ACCP) is attracting investor interest as drugs developed by the company to treat cancer may become blockbusters. The drugs could become blockbusters at a time when the stock is undervalued, citing Kevin Raidy of health-care hedge fund H4 Capital. The shares could rise to $10-$20 within two years.
- Archer-Daniels-Midland’s(ADM) may regain some of the value they lost as ethanol fell out of favor with investors recently. Carl Birkelbach of Birkelbach Investment Securities estimated the stock will rise to $46 this year.

Night Trading
Asian Indices are +.50% to +1.25% on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
- (APCC)/.21
- (AXL)/-.03
- (ACI)/.39
- (CVX)/1.73
- (GCI)/1.49
- (ITT)/.67
- (NYX)/.46
- (R)/1.09
- (THQI)/.97
- (WEN)/.21

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for January is estimated at 150K versus 167K in December.
- The Change in Manufacturing Payrolls for January is estimated at -11K versus -12K in December.
- The Unemployment Rate for January is estimated at 4.5% versus 4.5% in December.
- Average Hourly Earnings for January are estimated to rise .3% versus a .5% gain in December.

10:00 am EST
- Factory Orders for December are estimated to rise 1.9% versus a .9% gain in November.
- The Final Univ. of Mich. Consumer Confidence for January is estimated at 98.0 versus prior estimates of 98.0.

BOTTOM LINE: Asian indices are higher, boosted by technology and industrial shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

DJIA Hits Another All-Time High as Energy Prices Fall and Economic Optimism Rises

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In Play

DJIA Hits Another All-Time High on Economic Optimism, Lower Energy Prices, Healthy Earnings

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Retail longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is heavy. Earnings growth is decelerating, yet I am seeing more violent upside reactions by stocks to earnings reports than I have seen in a very long time. This could help break the mentality of "sell all good news" that has dominated trading in the current U.S. negativity bubble. This is a very positive development. Mostly strong economic reports of late have led to some talk that growth would accelerate to such an extent this year that the Fed would have to hike rates. Cyclicals are soaring 5% higher already this year. While economic growth is accelerating from last year's midyear slowdown, I suspect growth will average about 3% this year. It will feel like less than 3%, however, due to how much less the deflator will likely subtract from nominal growth than last year. It is interesting to note that "high-school dropout copper" is trading near recent lows, falling 2.5% today, despite the stronger economic data and extreme speculation in many other commodities. I suspect if you are an aggressive trader that today may be a good day to take profits in some of the deep cyclicals that have had big runs. I expect US stocks to trade mixed-to-higher into the close from current levels on economic optimism, bargain-hunting, short-covering and lower energy prices.

Today's Headlines

Bloomberg:
- The DJIA is hitting another all-time high after the government said consumers spent more without fueling inflation.
- Natural gas is falling 2% today after inventories fell less than expected, leaving supplies at record highs for this time of the year.
- Venezuela may devalue its currency this year as accelerating inflation boosts demand for foreign exchange while falling oil prices draw fewer dollars to the economy, Bear Stearns said.
- Exxon Mobil(XOM) and Royal Dutch Shell Plc, the world’s two biggest oil companies, posted higher-than-expected fourth-quarter profits after gains in production softened the blow of declining energy prices.
- Russian companies traded in London are tied so tightly to the Russian government that investors should beware, said Alexander Temerko, a former vp of OAO Yukos Oil Co.
Wall Street Journal:
- A group led by Vornado Realty Trust may raise its bid today for Equity Office Properties Trust(EOP), the real-estate trust founded by Chicago billionaire Sam Zell.

NY Times:
- French President Jacques Chirac said in an interview this week that Iran’s possession of one or two nuclear weapons would not pose a big danger, one of many remarks he retracted a day later.

Washington Times:
- Democratic House Speaker Nancy Pelosi requested that the Bush administration allow her staff, relatives and other members of the California delegation access to military aircraft for domestic flights.

Beijing Antaike Information Development Co.:
- Aluminum output in China, the world’s biggest producer, rose 20% in 2006, citing figures form the National Bureau of Statistics.

Khaleej:
- Oil markets remain oversupplied even as OPEC starts to implement a second round of output cuts, citing Iranian Oil Minister Kazem Vaziri-Hamaneh. “Oil supplies from countries outside OPEC have increased “a lot” and the weather in Europe is “warmer than past years,” he said.